CITI: BET AGAINST US
There was an interesting research note out of Citi this week. Citi analyst Alvin Wang says the rally will fade and that investors should be buying puts.
“Despite the rally, credit and option markets are pricing in increased downside risk,” New York-based Citigroup strategist Alvin Wang wrote in a note sent to clients today.
He recommended puts giving the right to sell the Financial Select Sector SPDR Fund, an exchange-traded fund that tracks a basket of bank stocks, for $8 before May 15. The XLF, as the ETF is known, added 5.5 percent to $8.81 in New York, bringing its gain since March 6 to 43 percent. The May $8 puts fell 25 percent to 70 cents today.
The difference between prices for bullish and bearish options, known to options traders as “skew,” and prices for credit-default swaps, which are used to protect against a default on a company’s debt, both show that investors expect the XLF to reverse gains, the strategist wrote.
Put prices rose 35 percent relative to call prices this month, even as the XLF added almost 10 percent before today, the strategist said. That means investors are paying more to use options as protection against a decline at the same time as the ETF’s share price is rising.
“This is an interesting reversal,” Wang wrote. “The higher the spread is, the more premium investors are placing on downside protection.”
Personally, I wouldn’t own puts on the banks heading into the first few weeks of earnings season when the banks report. There is going to be all sorts of accounting shenanigans when the banks report “better than expected” numbers.
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Provided the bond markets don't start imploding by the time the banks start reporting. Bernanke had to purchase 1/3rd of all the offerings last week. I can only see his ratio going up from here.